Hundreds of children are being forced by Zimbabwe's army to dig for diamonds to bankroll senior lieutenants of President Robert Mugabe, a Human Rights Watch investigation has found.

Researchers believe that revenue from illegal trading of the gems is being funnelled to Mugabe's senior lieutenants in his Zanu-PF party, as well as the Reserve Bank of Zimbabwe, which has underwritten some military operations. The money could prove a lifeline for Zanu-PF as it regroups ahead of the next election, expected in two years' time.

The report, published today, claims the army is torturing and beating villagers on the diamond fields of Marange district in eastern Zimbabwe. The atrocities follow a massacre last year in which more than 200 people were killed when troops seized control of mining and trading.

The army rapidly formed syndicates, often using forced labour, Human Rights Watch found. It is estimated that up to 300 children continue to work for soldiers in the diamond fields. A 13-year-old girl said: "Every day I would carry ore and only rest for short periods. We always started work very early in the morning, before eight, and finished when it was dark, after six. All I want now is to go back to school."

The HRW report, Diamonds in the Rough, threatens to embarrass the unity government. The prime minister, Morgan Tsvangirai, of the Movement for Democratic Change, has spent the past fortnight trying to convince foreign leaders that its reforms now merit financial support. But the police and army remain under the control of Mugabe's Zanu-PF.

The report says: "While Zimbabwe's new power-sharing government, formed in February 2009, now lobbies the world for development aid, millions of dollars in potential government revenue are being siphoned off through illegal diamond mining, smuggling of gemstones outside the country and corruption." It adds: "The government could generate significant amounts of revenue from the diamonds, perhaps as much as $200m per month, if Marange and other mining centres were managed in a transparent and accountable manner. This revenue could fund a significant portion of the new government's economic recovery programme, which would benefit ordinary villagers, like the residents of Marange."

Three years ago a diamond rush brought thousands of illegal diggers to the Chiadzwa area of Marange district. Witnesses interviewed by HRW said that the police, ostensibly deployed in the fields to end illicit smuggling, were in fact responsible for serious abuses, often by so-called "reaction teams".

Miners described colleagues being buried alive. A police officer working with a reaction team told HRW of orders from senior officers to "shoot on sight" miners found in the fields. Villagers described arbitrary arrests, beatings, and harassment that by May 2008 had swamped a local prison with 1,600 prisoners, 1,300 more than its capacity.

Then, late last year, the military launched its own crackdown. HRW says that in "Operation Hakudzokwi" (No Return), purportedly an attempt to impose order on the fields, military helicopters with mounted automatic rifles flew over Marange to drive out local miners. Soldiers on the ground indiscriminately fired live ammunition and teargas into the diamond fields and surrounding villages. Over three weeks, more than 200 people were killed. Soldiers forced miners to dig mass graves for many of the dead.

The police and military have access to Marange's mineral wealth at a time when the government is struggling to pay their wages. Soldiers continue to torture and beat villagers, accusing them of being or supporting illegal miners who are not working for the army, the report claims. "The police and army have turned this area into a nightmare of lawlessness and violence," said Georgette Gagnon, Africa director at HRW. "Zimbabwe's new government should get the army out of the fields, put a stop to the abuse, and prosecute those responsible."